Capital Gains Tax Between India and China Under DTAA

Capital Gains Tax Rate Between India and China

The India-China Double Taxation Avoidance Agreement (DTAA), signed on 18 July 1994 and amended by the Protocol of 26 November 2018, contains comprehensive provisions on capital gains taxation under Article 13. Unlike dividends, interest, and royalties — which carry a uniform 10% withholding tax cap — capital gains under the India-China treaty follow a more nuanced framework where the right to tax depends on the type of asset being alienated.

The treaty follows the UN Model Tax Convention, which grants broader source-country taxation rights than the OECD Model. This is particularly significant for capital gains, as the India-China DTAA allows the source state to tax gains on virtually all categories of property — including a critical residual clause under Article 13(5) that permits source-country taxation of gains not covered by other paragraphs. This source-oriented approach means that gains arising in India from alienation of assets by a Chinese resident are generally taxable in India, and vice versa.

Understanding these provisions is essential for Chinese investors with Indian assets and Indian investors with Chinese holdings, as the treaty's capital gains framework significantly affects investment structuring, exit planning, and overall tax efficiency in cross-border transactions between the world's two most populous economies.

Treaty Rate vs Domestic Rate: Detailed Comparison

Unlike withholding taxes on passive income, capital gains under the India-China DTAA are not subject to a simple rate cap. Instead, the treaty allocates taxing rights to specific countries based on the nature of the asset. Here is how the treaty provisions compare with India's domestic capital gains rates for non-residents:

The key distinction between the India-China DTAA and many other Indian treaties (such as the pre-2017 India-Singapore or India-Mauritius DTAAs) is Article 13(5) — the residual clause. Under this provision, gains from alienation of any property arising in a Contracting State that are not covered by paragraphs 1 through 4 may be taxed in that Contracting State. This means India retains the right to tax capital gains on shares, securities, and other assets sold by Chinese residents, even when no permanent establishment exists in India.

India's domestic capital gains rates for non-residents, as updated by the Finance Act 2024 (effective 23 July 2024), impose 12.5% on long-term capital gains and 20% on short-term capital gains from listed equity (with the LTCG exemption threshold of INR 1.25 lakh). These domestic rates apply fully when the treaty grants India the right to tax.

Who Qualifies for Treaty Provisions on Capital Gains

The capital gains provisions under Article 13 apply when the taxpayer meets several treaty requirements:

Tax Residency Requirement

The person claiming treaty protection must be a tax resident of either India or China. For Chinese residents, this means being subject to tax in China by reason of domicile, residence, place of head office, or any other criterion of a similar nature. The taxpayer must hold a valid Tax Residency Certificate (TRC) issued by China's State Taxation Administration.

Beneficial Ownership and Anti-Abuse Tests

The 2018 Protocol introduced Article 27A (Entitlement to Benefits), which contains a Principal Purpose Test (PPT). Under this provision, treaty benefits — including favourable capital gains treatment — will be denied if one of the principal purposes of an arrangement or transaction was to obtain the treaty benefit, unless granting the benefit is in accordance with the object and purpose of the relevant provisions. This is particularly relevant for capital gains, where restructuring is sometimes undertaken to shift the situs of gains.

India's GAAR Provisions

India's General Anti-Avoidance Rules (GAAR), effective from 1 April 2017 under Chapter X-A of the Income Tax Act, provide an additional layer of scrutiny. If the tax authorities determine that an arrangement is an impermissible avoidance arrangement lacking commercial substance, capital gains benefits under the DTAA may be denied. GAAR has been invoked in cases involving interposition of entities in treaty-favourable jurisdictions to access capital gains exemptions.

Capital Gains-Specific Treaty Provisions Under Article 13

Article 13(1): Gains from Immovable Property

Gains derived by a resident of one Contracting State from the alienation of immovable property referred to in Article 6 (which defines immovable property by reference to the law of the state where the property is situated) and situated in the other Contracting State may be taxed in that other state. This means a Chinese resident selling real estate in India is subject to Indian capital gains tax, and an Indian resident selling property in China is subject to Chinese tax.

The definition of immovable property includes land, buildings, accessories to immovable property, rights to which the provisions of general law respecting landed property apply, usufruct of immovable property, and rights to variable or fixed payments as consideration for the working of mineral deposits, sources, and other natural resources.

Article 13(2): Shares Deriving Value from Immovable Property

Gains from the alienation of shares of the capital stock of a company whose property consists directly or indirectly principally (more than 50%) of immovable property situated in a Contracting State may be taxed in that state. This provision prevents taxpayers from avoiding source-country taxation by selling shares in a property-holding company rather than selling the underlying immovable property directly. This aligns with India's domestic indirect transfer provisions under Section 9(1)(i) of the Income Tax Act.

Article 13(3): Movable Property Forming Part of a PE

Gains from alienating movable property forming part of the business property of a permanent establishment that an enterprise of one state has in the other state — including gains from the alienation of the PE itself (alone or with the whole enterprise) — may be taxed in the state where the PE is situated. This provision ensures that business assets connected to an Indian PE of a Chinese enterprise are taxable in India upon disposal.

Article 13(4): Ships and Aircraft in International Traffic

Gains from the alienation of ships or aircraft operated in international traffic, or movable property pertaining to the operation of such ships or aircraft, are taxable only in the Contracting State in which the enterprise is resident. This residence-only taxation is consistent with the broader principle that international transportation profits are taxed in the enterprise's home country.

Article 13(5): Residual Clause — All Other Property

Gains arising in a Contracting State from the alienation of any property other than that referred to in paragraphs 1 through 4 may be taxed in that Contracting State. This is the most significant provision for cross-border investment between India and China, as it grants India the right to tax gains on shares (including listed shares), securities, and other financial instruments sold by Chinese residents, provided the gains arise in India.

This residual clause follows the UN Model (which favours source-country taxation) rather than the OECD Model (which would reserve such gains exclusively for the residence state). For Chinese investors in Indian companies, this means that capital gains on the sale of Indian shares are fully taxable in India under domestic law, with the Chinese investor entitled to claim a foreign tax credit in China to avoid double taxation.

Documentation Required for Capital Gains Transactions

When a Chinese resident realises capital gains from Indian assets, the following documentation is essential:

Tax Residency Certificate (TRC)

A valid TRC from China's State Taxation Administration confirming the taxpayer's Chinese residency for the relevant financial year. While the treaty grants India taxing rights on most capital gains, the TRC is still necessary for determining treaty applicability and for the Chinese taxpayer to claim foreign tax credits in China.

Form 10F

The non-resident must file Form 10F electronically on the Indian income tax portal, providing details including name, status, nationality, tax identification number, period of residential status, and address in China.

Capital Gains Computation Statement

A detailed computation showing the cost of acquisition, indexed cost (where applicable under Indian law), sale consideration, and resulting short-term or long-term capital gain, prepared in accordance with Sections 45 to 55 of the Income Tax Act.

PAN (Permanent Account Number)

A Chinese resident earning capital gains in India should obtain an Indian PAN. Without a PAN, TDS on capital gains may be deducted at a higher rate under Section 206AA. Having a PAN also enables the taxpayer to file an Indian income tax return and claim refunds if excess tax has been deducted.

Withholding Procedure for Indian Payers (Section 195)

When an Indian buyer acquires shares or property from a Chinese resident, Section 195 of the Income Tax Act requires the payer to deduct tax at source on the capital gains component. The procedure is as follows:

Step 1: Determine the Nature of Capital Gain

Establish whether the gain is short-term or long-term based on the holding period. For listed equity shares, holdings exceeding 12 months qualify as long-term. For unlisted shares, the threshold is 24 months. For immovable property, it is also 24 months.

Step 2: Compute the Capital Gain

Calculate the capital gain as the difference between the sale consideration and the cost of acquisition (with indexation benefits for long-term gains on specified assets under Section 48, where applicable). From 23 July 2024, indexation is no longer available for most asset classes, and a flat 12.5% rate applies to LTCG.

Step 3: Deduct TDS at the Applicable Domestic Rate

Since the India-China DTAA does not cap capital gains at a specific rate (it merely allocates taxing rights), India's domestic capital gains rates apply in full. TDS should be deducted at the applicable rate — 12.5% for LTCG on listed shares (above the INR 1.25 lakh threshold), 12.5% for LTCG on unlisted shares, and 20% for STCG on listed shares.

Step 4: File Form 15CA and Form 15CB

For remittances arising from the sale of Indian assets by a Chinese non-resident, the Indian payer must file Form 15CA online and obtain a Chartered Accountant's certificate in Form 15CB. This is mandatory for all foreign remittances exceeding INR 5 lakh and must be completed before the authorised dealer bank processes the payment.

Step 5: Lower Withholding Certificate (Section 197)

If the actual capital gains liability is lower than the TDS amount (for instance, after applying the cost of acquisition), the non-resident seller may apply for a lower or nil withholding certificate under Section 197 of the Income Tax Act. This requires filing an application with the Assessing Officer before the transaction.

Common Disputes and Judicial Precedents

Indirect Transfer Taxation

Following the Vodafone case (2012) and the subsequent introduction of Section 9(1)(i) in the Finance Act 2012, India taxes capital gains arising from the transfer of shares in a foreign company if those shares derive substantial value from assets located in India. Under the India-China DTAA, Article 13(2) specifically addresses shares deriving value principally from immovable property. However, disputes have arisen regarding whether the indirect transfer provisions extend to shares deriving value from business assets (not just immovable property) and whether the DTAA limits India's domestic law rights in such cases.

Source of Capital Gains

Article 13(5) allows taxation of gains "arising in" a Contracting State. The question of when gains "arise" in India — particularly for shares of Indian companies held through intermediary jurisdictions — has been the subject of litigation. The Indian tax authorities have taken a broad view, asserting that gains from shares of an Indian company arise in India regardless of where the transaction is executed.

Fair Market Value and Valuation Disputes

When shares are transferred between related parties (common in Sino-Indian joint ventures), the Indian tax authorities may challenge the sale consideration under Section 56(2)(x) (deemed consideration) or Section 50CA (fair market value for unlisted shares). Valuation disputes frequently arise in cross-border share transfers, and taxpayers must maintain robust valuation reports prepared by independent valuers.

Treaty Shopping via Hong Kong

Some Chinese investors historically structured investments through Hong Kong to access the India-Hong Kong DTAA, which offered more favourable treatment. The 2018 Protocol's PPT provisions and India's GAAR significantly curtail such arrangements. For a comparison, see our India-Hong Kong DTAA guide.

Practical Examples and Calculations

Example 1: Chinese Company Selling Indian Subsidiary Shares

A Chinese company acquired 100% equity in an Indian private limited company for INR 10 crore in 2019. In 2026, it sells the shares for INR 25 crore. Holding period: more than 24 months (long-term).

• Treaty position (Article 13(5)): Gains arise in India — India has the right to tax
• Capital gain: INR 25 crore - INR 10 crore = INR 15 crore
• India tax (LTCG at 12.5%): INR 1.875 crore
• China tax: China's enterprise income tax rate is 25%. China will include the gain in taxable income and grant a foreign tax credit for the Indian tax paid (INR 1.875 crore), resulting in a net Chinese tax of approximately INR 1.875 crore (25% minus 12.5% credit)
• Total tax burden: Approximately 25% (shared between India and China)

Example 2: Chinese Individual Selling Indian Real Estate

A Chinese-resident individual purchased an apartment in Mumbai for INR 2 crore in 2020 and sells it for INR 3.5 crore in 2026. Holding period: more than 24 months (long-term).

• Treaty position (Article 13(1)): Immovable property gains taxable in India
• Capital gain: INR 3.5 crore - INR 2 crore = INR 1.5 crore
• India tax (LTCG at 12.5%): INR 18.75 lakh
• China credit: The individual claims foreign tax credit in China for the INR 18.75 lakh paid in India

Example 3: Chinese Investor Selling Listed Indian Shares

A Chinese institutional investor sells listed Indian shares worth INR 50 crore, realising a long-term capital gain of INR 8 crore (holding period exceeding 12 months).

• Treaty position (Article 13(5)): Gains arising in India are taxable in India
• India tax: LTCG at 12.5% on gains exceeding INR 1.25 lakh = approximately INR 1 crore
• China credit: The investor claims a foreign tax credit in China under Article 23 (elimination of double taxation)
• Compliance: The Indian broker deducts TDS; the investor may file an Indian return to claim the INR 1.25 lakh exemption threshold

For professional guidance on capital gains tax compliance in cross-border transactions, consider BeaconFiling's tax advisory services and our FEMA and RBI compliance support.

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